The Palladium Pivot: Russia Crisis Powers Metal Even As Autos, Chips Down

From 22% down last year, palladium is up 22% this year—or at least for January.

The ‘Palladium Pivot’—if it can be called that—isn’t based on scorching demand or production outages involving the autocatalyst metal.

Palladium Monthly Chart

All charts by skcharting.com

Global supply chains for microchips are still disrupted and US manufacturers, including carmakers, have less than five days of inventory for essential microchips, the White House says. Auto production is only expected to recover gradually this year as the industry works its way through the mess. And palladium—as an emissions purifier and performance booster in gasoline engines—is dependent on that recovery.

On the mining side, “so far there has been no disruption to production and exports” of palladium, which largely comes out of Russia and South Africa, says Giovanni Staunovo, an analyst at UBS.

So, why are prices of the metal rallying?

Simple: Fear that the Russian-Ukraine conflict will lead to a full-blown war and disrupt palladium production from the region. Russia alone accounts for 43% of the world’s palladium.

"Concerns about supply outages in Russia in the event of an escalation of the Ukraine crisis have supported palladium in recent weeks," Staunovo said in a comment carried by Reuters on Monday. 

He added that short-covering activity of palladium futures on New York’s COMEX “likely also helped, considering non-commercial accounts were net-short the white metal at the start of this year."

Palladium finished 2020 at $2,455.50 and was down to $1,903 by the close of last year. At Monday’s settlement on COMEX, it was at $2,335.

In a Jan.19 industry outlook, Trading Economics said it was bearish on palladium through 2022, predicting it will trade at $1,821.77 per ounce by the end of the first quarter and $1,661.72 in 12 months’ time.

Thus, the January rally has bucked the expectations of most analysts. And understandably so, given that there’s been no change in palladium’s own supply or fundamentals. 

Palladium Weekly Chart

But the threat of war, however improbable it may be, often brings a premium to commodities, and palladium, as a result, is enjoying a highly unexpected—and possibly premature—run-up now. 

Analysts at ICBC, meanwhile, said in a November note to their clients that palladium could start running up in June—underscoring the “premature” aspect of the current rally.

According to the ICBC analysts: 

“We believe there is a strong probability that when the Covid storm finally passes there will be a rapid rebound in both consumer and business demand for new vehicles. That demand will meet an industry running with low inventories of finished goods.”

They added:

“And so a demand surge plus restocking cycle could prove to be a powerful force for a recovery in the palladium price, and that recovery may persist for longer than the market anticipates. But in our assessment that scenario is highly unlikely to emerge in the next six months.”

Palladium Daily Chart

Although vehicle manufacturing is anticipated to remain below pre-pandemic levels in 2022, Metals Focus says palladium could rise to a quarterly average of $2,300 by Q4.

With semiconductor shortages expected to ease in the second half of 2022, analysts at ANZ project that palladium demand for autocatalysts will increase by 449,000 ounces in 2022, with a widening deficit in supply. ANZ’s palladium forecast for 2022 has the metal trading around $2,350 per ounce by the end of December, averaging $2,088 per ounce for the year.

All these bring to question the current palladium rally: Since no one knows how long the Russia-Ukraine conflict could drag out, how much higher technically can prices go if they maintain their present upward momentum?

“Strictly, chart-wise, this rally could go on for a few more months, with momentum to even hit record highs,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“But the catalyst here is a geopolitical showdown, thus some conventional thinking is needed.”

The January high of $2,452 and close of $2,350 initiated a third bullish wave of palladium that could see the metal retest the April 2021 record high of $3,014 in the coming months, depending on prices holding above the monthly middle Bollinger Band® of $2,203 and sustaining above the 5-months Exponential Moving Average of $2,580, Dixit said.

The monthly stochastic reading of 40/23, meanwhile, gives a strong positive crossover above the 20 line. The weekly stochastic readings of 99/95 are also causing sideways distribution of bullish momentum, feeding into the middle Bollinger Band of $2,280 and horizontal support areas of $2,150, Dixit said.

“Combined, these are what have made the autocatalyst overbought,” he said, adding:  

“Outlook for the current and next month is bullish, with potential for correction to support areas. Since the trend has changed to bullish, buyers are likely to come in at the test of value areas.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.